An NRI might want an exemption under two circumstances: either his Indian income is exempt due to benefit available under a DTAA or his total income in India is expected to be less than the threshold of Rs 1.8 lakh.

If the DTAA between the country of an NRI's residence and India allows a lower rate or zero rate of TDS, the NRI would need to submit a tax residency certification from the tax department of the country of his residence. This will certify that he is a tax paying resident in that other country and that tax on that income is being duly paid in that country. In countries like the US, if an Indian resident is earning income from a US source, and he wants to claim exemption from US withholding tax, he does not need to submit a tax residency certificate issued by the Indian tax authority. He must only fill up a self-declaration form W8Ben to his payer.

If an NRIs total income is lower than the basic exemption limit of Rs 1.8 lakh, the process is even more complicated. In such cases, the NRI may apply to the Income Tax Officer in his jurisdiction in India, requesting for a waiver of TDS. If the Tax Officer grants the waiver, the NRI may submit this to the payers such as your bank and claim TDS exemption.

But the process is not very easy. "Granting waiver depends on the discretion of the Tax Officer and may or may not come through easily. So if you are faced with such a circumstance, it is best to file your tax returns and claim a refund of the TDS," says Sandeep Shanbhag, Director - Wonderland Investments and an expert in all NRI financial and taxation matters.

TDS for NRIs living in countries where there is no tax

There is a peculiar scenario of DTAAs that India has signed with countries that do not have personal tax. Shanbhag explains, "The basis of a DTAA is that a particular income is taxed in both countries. However there are instances where a foreign country may not levy personal tax on its residents, yet India has a DTAA with those countries that allows NRIs of those countries to avail a reduced rate of TDS. This is a grey area."

In such cases, currently each bank might have its own way of handling this. Some banks like the State Bank of India require NRIs to submit a self-declaration form if they reside in a country that has zero tax, but has a DTAA with India that offers a lower rate of TDS. On submitting this self declaration, the bank will deduct tax at source at the reduced rate instead of the mandated 30% rate.

The declaration however states that the NRI 'shall be fully responsible to State Bank of India for any Indian Income tax liability including interest, penalty etc. that may arise on account of the bank applying a lower rate for tax deduction at source based on this declaration.'